Cost Benefit Analysis - Mishan & Quah 2. Cost Effective Analysis · However useful Cost Effective Analysis is, Cost Benefit Analysis is effectively superior. · 'In sum, economic valuation of the benefits of a programme in addition to the calculation of its cost will provide all the relevant economic information necessary to enable policy makers to make more judicious decisions. 3. Proposals for Weighting Money Valuations · impact on distribution of welfare has led to measurements changing from money to utility i.e. each dollar gain or loss corresponds a particular marginal utility. Higher the income group the lower the marginal utility of a dollar gain or loss. · Using tax brackets to correspond with marginal utilities. Splitting the economy into two tax brackets, rich pay 80p and poor pay ttiOp. We may infer that 80p for the rich has a utility of ttiOp for the poor. · Third method of weighting is to calculate the set of weights as a ratio between income groups and average national income. . No matter how accurate the set of utility weights are, their incorporation into a CBA does not in general serve the purpose for which they are designed - to promote equity. CBA cost benefit criterion could still allow projects that allow rich to get richer and poor to get poorer if the rich proportionally richer. 4. Basic Concepts of Benefits and Costs. · Consumer Surplus: 'The consumer surplus of a person is measured by the most he would pay for a thing less the amount he actually pays."
· 'In CBA, the emphasis on ceteris paribus clause of the market demand curve for good x is on the constancy of the prices of goods closely related to good x. Consumer surplus isn't affected by changes in prices of related goods.' 5. Consumer Surplus when several prices change. · Fall in the price of good x -> increase in consumer surplus for good x -> leftward shift in demand for good y > price of good y falls. Sum of these two consumer surplus areas is a measure of the amount that consumers are willing to pay for reducing the price of good x from ptti to p2 when, as a result the price of good y will also fall from ptti' to p2'. 6. Consumer Surplus when other things change · Population growth and growth of per capita real income are the two components of aggregate economic growth and together contribute over time to the growth of social benefits from investments currently being undertaken · Avoidable waste is the price paid for the acceptance of persuasive advertising. tt. Introduction to the compensating variation · Compensating variation: this measures the largest sum a person is willing to pay for a good (or removal of a bad) · Equivalent variation: this measures the smallest sum a person will accept to forego a good (or accept a bad) · Both measures an individuals gain or loss of their welfare · More generally, CV can